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2024 (7) TMI 1177 - AT - Income TaxTP Adjustment - international transaction of payment of guarantee fees to AE - HELD THAT - We observe that the assessee demonstrated that the effective borrowing cost, including the guarantee fee, was (11.75%) lower than the bank's quoted interest rate (16%), thus justifying the economic rationale for the guarantee fee. TPO did not present compelling evidence to establish that the guarantee fee was unwarranted. The benefits derived, as seen in lower interest rates and favorable operating margins, substantiate the transaction's arm's length nature. For A.Y. 2009-10, the Tribunal had deleted a similar addition, justifying the payment of guarantee commission. This decision was upheld by the Hon ble Gujarat High Court 2018 (7) TMI 2349 - GUJARAT HIGH COURT which noted the consistency of the assessee's operating margin and the benefit of lower borrowing costs compared to bank rates, thereby justifying the guarantee fee. The present case mirrors the facts and circumstances of A.Y. 2009-10, where the addition was deleted by the Tribunal and upheld by the Hon ble Gujarat High Court. Consistency in judicial decisions is crucial to maintain legal certainty and fairness. Thus, we find that the TP adjustment made by the AO/TPO and upheld by the DRP is unjustified. The addition on account of the guarantee fee payment to AE is hereby deleted. Ground raised by the assessee is allowed.
Issues:
Transfer Pricing Adjustment on payment of guarantee fees to Associated Enterprise. Detailed Analysis: Issue 1: TP Adjustment on Guarantee Fees The appeal concerns an adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) regarding the payment of guarantee fees to the Associated Enterprise (AE) by the assessee. The Arm's Length Price (ALP) of the guarantee fees was determined at NIL, leading to an upward adjustment proposed by the TPO amounting to Rs. 52,91,667. The TPO found that no distinct benefit accrued to the assessee from the guarantee, and the transaction was benchmarked at NIL due to lack of services rendered by the AE. The Dispute Resolution Panel (DRP) upheld the TPO's decision, leading to the present appeal. Issue 2: Comparison with Previous Year The assessee highlighted a similar transaction in the previous year (F.Y. 2009-10) where a guarantee fee was paid to the AE, resulting in a lower effective borrowing cost compared to bank rates. The Tribunal had deleted the addition made in the previous year, and this decision was upheld by the Hon'ble Gujarat High Court. The inconsistency in the treatment of the guarantee fee in the present year compared to the previous year formed a crucial aspect of the appeal. Issue 3: Judicial Precedents The Tribunal referred to the judgment of the Hon'ble Gujarat High Court in the previous year's case, emphasizing the economic rationale for the guarantee fee based on the lower borrowing costs and favorable operating margins. The Tribunal concluded that the present case mirrored the facts and circumstances of the previous year, where the addition was deleted by the Tribunal and upheld by the High Court. Consistency in judicial decisions was deemed essential for legal certainty and fairness. Conclusion After thorough consideration of the arguments presented by both parties and the judicial precedents, the Tribunal found that the TP adjustment made by the AO/TPO and upheld by the DRP was unjustified. The addition of Rs. 52,91,667 on account of the guarantee fee payment to the AE was deleted, and the ground raised by the assessee was allowed. As a result, the appeal of the Assessee was allowed, and the order was pronounced in the Open Court on 12th July 2024 at Ahmedabad.
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